Venture Firms Win With Billion-Dollar Quick Flips

Venture capital firms, already reveling in the most vibrant initial public offering market in more than half a decade, are being further propelled by a spate of billion-dollar acquisitions.

Facebook Inc.’s agreement to buy Oculus VR Inc. this week for as much as $2.3 billion marked the fourth 10-digit deal this year of a venture-backed company. Just nine months ago, two-year-old Oculus raised money from Matrix Partners and Spark Capital at a $70 million valuation.

The quick sale comes a month after Facebook agreed to spend $19 billion on WhatsApp Inc. and seven weeks after Google Inc. completed its $3.2 billion purchase of Nest Labs Inc. Neither of those companies had raised venture financing before 2010. Such fast returns on capital keep venture firms from having to pump numerous rounds of financing into companies while waiting years for a potential IPO.

“We’re early-stage investors and it takes five to seven years for companies to mature,” Santo Politi, a venture capitalist at Boston-based Spark, said in an interview yesterday on Bloomberg West. “We didn’t expect it to be this quick. It happens with amazing teams.”

The recent success of venture capital is bringing increased competition from hedge funds, private-equity firms and mutual funds, which are looking for ways to profit from the technology shifts under way in mobile, cloud computing and connected devices. In addition to the rush of IPOs and acquisitions, startups are raising $100 million private rounds at a record pace from asset managers like BlackRock Inc., T. Rowe Price Group Inc. and Tiger Global Management LLC.

Industry Rebound

For the venture industry, the acquisitions are fueling a rebound after returns lagged public markets for a decade, according to data published last year from Cambridge Associates LLC. Scores of startups failed in the dot-com crash from 2000 to 2003, and the IPO market screeched to a halt during the financial crisis starting in 2008.

Last year, at least 10 venture firms generated returns of $1 billion or more from acquisitions and IPOs, of which Twitter Inc. was the biggest. Pension funds and endowments, which serve as limited partners in venture firms, are coming back, said Byron Deeter of Bessemer Venture Partners in Menlo Park, California.

Faster Pace

After WhatsApp, Nest and Oculus, the next biggest deal this year was VMware Inc.’s $1.54 billion purchase of AirWatch LLC, whose technology helps businesses protect and manage mobile devices. The four deals in the first three months of this year match the total number of billion-dollar acquisitions of venture-backed companies in 2012 and 2013 combined, according to data compiled by Bloomberg.

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There’s been almost no acquisition-related money to be made in the public technology market. Lenovo Group Ltd. is spending about $5 billion buying the Motorola Mobility handset business from Google and the low-end server unit from International Business Machines Corp. The only other big purchase so far this year was RF Micro Devices Inc.’s agreement in February to acquire TriQuint Semiconductor Inc. for $1.59 billion.

On the Oculus deal, Matrix and Spark made about 20 times their money, while Sequoia Capital parlayed an investment of $58 million in text messaging company WhatsApp into about $3.5 billion. Nest, a maker of Web-connected thermostats, provided more than 15-fold returns to backers Kleiner Perkins Caufield & Byers and Shasta Ventures.

Diversity Risk

One potential risk in the current market is the lack of diversity among acquirers. Facebook and Google are spending on startups, though they have few rivals when it comes to seeking billion-dollar deals.

Yahoo! Inc. bought blogging company Tumblr Inc. last year for $1.1 billion and AirWatch was VMware’s second purchase in two years, after the $1.26 billion acquisition of software networking startup Nicira Inc. in 2012.

That doesn’t mean others aren’t looking. Oculus had plenty of interest in addition to Facebook, said Antonio Rodriguez, an Oculus board member and partner at Matrix in Boston.

“This is not a company that has lacked for suitors along the way,” Rodriguez said. “Facebook just did a much better job talking to the team.”